Field of the Invention
The embodiments of the present invention relate to a system and method for specified pool trading and, in particular, to a system and method for the creation, communication, price quotation, and execution of trades for specified pools of asset-backed securities.
Description of the Related Arts
Asset-backed securities are bonds that are backed by, or in other words “invested” in, a pool of assets, such as mortgages. Asset-backed securities use a pool of assets to diversify the security's holdings and reduce risk that the failure of any one asset in the pool will have a disproportional effect on the value of the whole.
The trading of asset-backed securities, such as mortgage-backed securities (MBS), has typically been performed on a to-be-announced (TBA) basis in which the buyer (also known as the “liquidity taker”) and seller (also known as the “liquidity provider”) agree on the general terms of the trade for a pool of assets. However, the specific assets that will be included in the security are not selected and are only revealed by the seller days after the trade, but in advance of the settlement of the trade. Thus, while the buyer can achieve a general investment objective through TBA trading, the buyer is unable to truly customize the security.
In the alternative, specified pool trading permits the buyer to select specific asset-backed securities to be included in the pool such that the details of the pool of assets is known to the buyer at the time of the trade. Thus, unlike TBA trading, the seller provides information to buyers about various asset-backed securities and the buyer makes its selections from the group of asset-backed securities provided by the seller. Due to the transparency, specified pool trading is generally higher cost than TBA trading.
In the recent market environment, buyers of asset-backed securities may begin to focus on the need to pick and choose the specific asset pools, namely specified pools, that may outperform or meet more particularized goals than generic TBAs. The ability to more accurately forecast the behavior of individual pools by better understanding the specific characteristics of the loans (and their respective borrowers in the case of MBS) can provide buyers with an additional ability to develop trading strategies virtually regardless of the market environment. This is one, among many, objectives of the present invention.
One of the technical problems with the current state of specified pool trading, particularly, in the mortgage-backed security markets, for example, is a lack of liquidity to adequately meet the needs of a growing focus on this type of financial instrument. This is because current systems and methods for trading specified pools of mortgage-backed securities are cumbersome and fail to provide an efficient and accessible platform for permitting liquidity providers (e.g., dealers; also known as market-makers) to offer various types of mortgage-backed securities, and for permitting liquidity takers (e.g., other dealers, investors and buy-side customers) to access a database of MBS, either specify criteria for stipulated pools or select one or more mortgage-backed securities to create a specified pool list, or select criteria for a to be created specified pool. Moreover, other systems fail to provide mechanisms permitting market participants to submit the selected pool(s) to one or more sellers, receive quotes from the sellers, and conduct trades for the specified pools. Additionally, current systems and methods fail to provide customers of asset-backed securities, such as MBS, the ability to specify criteria for a pool that is not currently listed in a seller's inventory, and submit that criteria to the seller for creation of a stipulated pool. The current methods for trading specified pools of asset-backed securities also fail to permit the straight-through-processing of specified pool trades. The lack of liquidity may ultimately lead to increased transaction costs and premiums over TBAs, and other inefficiencies. It, therefore, is another objective of the present invention, among others, to overcome some or all of the technical problems in the art.